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UPDATE 1-EU Commission says Germany should invest, France must reform

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(Adds detail, quotes, background)

By Jan Strupczewski

BRUSSELS, May 13 (Reuters) - Germany should take advantage of stronger economic growth to invest more and France needs fiscal reform so it can meet its deficit reduction targets by a 2017 deadline, the European Commission said on Wednesday.

In annual economic policy recommendations to all European Union countries except Greece and Cyprus, which are in bailout programmes, the EU executive arm also said Italy was justified in consolidating public finances more slowly to support reforms.

Germany, the euro zone's biggest economy, expects to have a structural budget surplus of 0.25 to 0.75 percent of GDP until 2019. Public debt is forecast to decline to 61.5 percent of GDP by 2019.

That is more ambitious than EU budget rules require. They say a country does not need to take further action once it reaches its medium-term budgetary objective -- in the case of Germany, a structural deficit of 0.5 percent of GDP.

The improvement in Germany's finances "creates the fiscal space to boost investment," the Commission said in its recommendation.

Many policymakers believe the euro zone's close trade links mean more spending by Germany would boost demand and growth throughout the 28-nation EU.

"Germany has a special responsibility in Europe and can lead by example. The authorities can use today's good times to further boost investment, especially in public infrastructure, education and research," Valdis Dombrovskis, the Commission vice president for the euro, told a news conference.

FRANCE

In March, EU finance ministers gave France two more years to bring its budget deficit below the EU ceiling of 3 percent of GDP by 2017 -- its third such extension since 2009. They set annual targets, asking France to cut the deficit by 0.5 percent of GDP in 2015, 0.8 percent in 2016 and 0.9 percent in 2017.

But France said making smaller structural cuts -- 0.5 percent in each of the three years -- would still get the deficit below 3 percent of GDP in 2017. It forecasts faster growth and says its deficit is smaller than earlier expected.

The Commission said Paris should be "taking the necessary measures for all years and using all windfall gains for deficit reduction." It also asked France to specify the spending it would cut and to have the effect of its proposals evaluated independently.

"It is essential for the French government to ... use the improved economic conditions to continue with its reforms agenda," Dombrovskis said. He specified labour market reform, competitiveness, an efficient tax system, wage setting and unemployment benefits.

ITALY

The Commission also granted Italy more deficit leeway, to support its economic reforms. EU rules say a country should cut its structural deficit by 0.5 pct of GDP a year until it reaches balance. The Commission said Italy could cut at least 0.25 percent of GDP this year and 0.1 percent of GDP in 2016.

It also asked Rome to quickly privatise state assets, use windfall gains to cut debt and implement an enabling law for tax reform by September 2015. (Reporting By Jan Strupczewski; Editing by Philip Blenkinsop, Larry King)

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